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Accruals
Characteristics of auditors’ quality in
non-audit services and accruals Malaysia

quality in Malaysia
Wahab Effiezal Aswadi Abdul 147
School of Accounting, Curtin University, Bentley, Australia
Received 5 October 2018
Wan Zurina Nik Abdul Majid Revised 22 December 2019
Accepted 29 December 2019
Faculty of Accountancy, Universiti Teknologi MARA, Shah Alam, Malaysia
Iman Harymawan
Department of Accounting, Universitas Airlangga, Surabaya, Indonesia, and
Dian Agustia
Faculty of Economics and Business, Universitas Airlangga, Surabaya, Indonesia

Abstract
Purpose – The purchase of non-audit services from incumbent auditors has generated considerable
attention. This study aims to examine the relationship between characteristics of non-audit services, namely,
the recurrence and types of services, and accruals quality in Malaysia.
Design/methodology/approach – This study analyzed hand-collected audit and non-audit fees of 1,117
observations from Malaysian firms from 2009 to 2011. This study used descriptive analysis, univariate tests
and multivariate regression to investigate the potential effect of non-audit services on accruals quality.
Findings – Non-audit services are associated with lower accruals quality. Recurring and non-recurring non-
audit service fees are detrimental to the quality of accruals, as are all types of recurring non-audit services.
Only non-recurring audit-related services decrease accruals quality. The results demonstrate that provisions
of non-audit services create economic bonding, and thus a threat to auditor independence. Results remain
robust with the inclusion of corporate governance and institutional variables.
Research limitations/implications – The sample period might represent a limitation as it only covers
three years of data. This limitation is mainly because of the nature of data collection of the non-audit services fees.
Practical implications – The findings could suggest a refinement on the Malaysian Institute of
Accountants (MIA) by-laws focusing on auditor independence, and it could assist other regulative bodies such
as the Securities Commission, the stock exchange (Bursa Malaysia) in ensuring better governance on the
provision of non-audit services.
Originality/value – This study is the first that provides evidence on the relationship between non-audit
services, types, and recurring and non-recurring non-audit services and accruals quality in Malaysia.
Keywords Auditor independence, Accruals quality, Non-audit services, Knowledge spillover,
Economic bonding, Audit quality
Paper type Research paper

1. Research aims
Evidence examining the impact of non-audit services on auditor independence is rather
extensive. Beginning with the seminal work of Simunic (1984) on non-audit services to Pacific Accounting Review
Vol. 32 No. 2, 2020
pp. 147-175
© Emerald Publishing Limited
0114-0582
JEL classification – M42 DOI 10.1108/PAR-10-2018-0072
PAR reviews by Francis et al. (2004, 2006), Schneider (2006) reflects the importance of examining
32,2 this issue even further. In Malaysia, Che Ahmad et al. (2006) and Abdul Wahab et al. (2013)
examine the relationship between non-audit services and audit fees and audit opinion.
Abdul Wahab and Mat Zain (2013) examine auditor independence by investigating the
activity of lowballing after the initial engagement. Although they find fees discount exists
during the initial engagement, no evidence suggests that impairment of independence exists
148 as auditors will earn a premium in fees after subsequent years. These studies, however, do
not take into consideration other factors that are deemed necessary in analyzing the impact
of non-audit services on auditor independence. Globally, limited evidence has been
presented in establishing the impact of various characteristics of non-audit services. As
highlighted by Alexander and Hay (2013), the limitation is mainly because of data
unavailability.
We offer four central objectives in this paper. The first is to investigate the relationship
between auditors’ non-audit services and accruals quality in Malaysia. The premise of such
a link is simple, but the effect of non-audit services is somewhat ambiguous. The provision
of non-audit services will result in economic bonding, or knowledge spillover could mean a
decrease or an increase in accruals quality, respectively.
The second objective is to investigate the impact of types of non-audit services on
accruals quality. Several studies (Abdul Wahab et al., 2014; Alexander and Hay, 2013;
Huang et al., 2007; Paterson and Valencia, 2011; Walker and Hay, 2013) have suggested that
certain types of non-audit services have different effects as related to economic bonding or
knowledge spillover on audit services. We segregated the non-audit services as tax-related,
audit-related and other non-audit services. The third objective is to investigate the nature of
these services, whether it is recurring or non-recurring, and its impact on accrual quality.
Schneider et al.’s (2006) review of non-audit services raises the importance of addressing the
subject of recurring and non-recurring non-audit services because ignoring them “muddies
the waters” makes it challenging to interpret empirical results. Competing views exist on the
impact of recurring non-audit services. Beck et al. (1988a) and Schneider et al. (2006) argue
that recurring non-audit services provide knowledge spillover. Causholli et al. (2014) suggest
that future non-audit services create economic bonding and thus undermine auditor
independence. By contrast, Beck et al. (1988a) indicate that non-recurring could undermine
auditor independence, whereas Causholli et al. (2014) suggest otherwise. The final objective
is to test the types and recurrence of these services simultaneously.
Malaysia is chosen for several reasons. First, there is limited evidence on the role of non-
audit services in the region. Several papers have examined the role of non-audit services in
Malaysia. Che Ahmad et al. (2006) and Abdul Wahab et al. (2013, 2014, 2015) examine the
relationship between non-audit and audit fees, the propensity of the going-concern audit
opinion and financial restatements. The findings are mixed and inconclusive, as some
studies identify the support of knowledge spillover (Che Ahmad et al., 2006; Abdul Wahab
et al., 2014), whereas others (Abdul Wahab et al., 2013, 2015) identify no such support.
However, none of the abovementioned studies examines the impact of non-audit services on
accruals quality. Second, Malaysia requires the disclosure of the non-audit services as part
of the listing requirements, and the annual reports provide information on the nature of
these services. Third, evidence regarding the nature and recurrence of non-audit services is
limited.
We are motivated for several reasons. First, as described by Habib (2012), the evidence
regarding the relationship between non-audit services and earnings quality is ambiguous.
Second, the study on earnings quality in Malaysia has been limited to an investigation of the
role of the International Financial Reporting Standards (IFRS) and earnings quality by
Wan Ismail et al. (2013), corporate governance (Abdul Rahman and Mohamed Ali, 2006; Accruals
Mohd Saleh et al., 2007; Hasnan et al., 2013), internal audit function (Johl et al., 2013) and quality in
audit opinion (Johl et al., 2007). However, no studies on earnings quality exist that include an
investigation of the impact of non-audit services in Malaysia, which suggests that this study
Malaysia
is timely. A recent study by Lai et al. (2016) investigates the relationship between busy
auditors, ethical behavior and discretionary accruals in Malaysia but does not include non-
audit services in their tests.
Similar to Srinidhi and Gul (2007) and Causholli et al. (2014), we choose accruals as our 149
proxy of audit quality or loss of independence. We extend the work of Abdul Wahab et al.
(2014) because that study focuses on financial restatements, whereas our study measures the
impact on accruals quality. The choice of accruals quality as our dependent variable as
opposed to a binary measure (Abdul Wahab et al., 2014) as this measure provides a variation
of earnings quality across the sample. Also, the residual values of the accruals model have
been known to capture managerial discretion and estimation errors (Dechow et al., 2010). We
measure accruals quality using a modification of the Dechow and Dichev (2002) measure, as
suggested by Francis et al. (2005).
Based on 1,117 firm-year observations from 2009 to 2011, and using the accruals model
of Francis et al. (2005), we find that non-audit services affect accruals quality negatively and
significantly by increasing the estimation error, which suggests that non-audit services
create economic bonding, which could affect auditor independence. Our results are similar to
those of Srinidhi and Gul (2007), who find that fees paid to auditors affect accruals quality.
We find that all types of non-audit services affect accruals quality negatively and
significantly. Our results are interesting, as we find that both recurring and non-recurring
non-audit fees affect accruals quality negatively and significantly.
This augments the existing literature to papers such as Alexander and Hay (2013),
Paterson and Valencia (2011), and Abdul Wahab et al. (2014). We find that all types of non-
audit service of a recurring nature work negatively against accruals quality. In addition, we
find that non-recurring audit-related non-audit services decrease accruals quality. The result
shows that the provision of non-audit services done by the incumbent auditors affects the
accruals quality, a signal of independent auditor issue. The same results hold for types of
non-audit services for the recurring. The findings could suggest a refinement on the
Malaysian Institute of Accountants (MIA) by-laws focussing on auditor independence, and
it could assist other regulative bodies such as the Securities Commission, the stock exchange
(Bursa Malaysia), in ensuring better governance on the provision of non-audit services.
We discuss the audit market in Malaysia in Section 2. We outline the rationale behind our
hypotheses and describe our sample in Sections 3 and 4, respectively. Sections 5 and 6
present the research methodology and results, respectively. Section 7 provides the
concluding the remarks.

2. Institutional background
2.1 Audit market in Malaysia
The accounting profession is not the only group responsible for instituting proper
accounting and auditing systems. The profession is supported by regulatory bodies such as
the Securities Commission, the Central Bank and the Company Commission of Malaysia; the
Accountant’s General Office and the Auditor’s General Office or Department; and corporate
players and directors and managers of companies. These bodies have a significant role in
ensuring that a sound financial-reporting system is in place to protect public interests.
To strengthen the independence of external auditors, the MIA has established by-laws on
professional ethics, conduct and practice. Section 290 indicates that under the
PAR Independence–Assurance Engagements, members of the assurance team and the firm
32,2 should be independent of the client during the period of engagement. The rules also require
that all companies that are listed on the Bursa Malaysia Listing Requirement disclose the
amount of non-audit services that are provided by an external auditor. The revised
Malaysian Code on Corporate Governance (2012) suggests that the audit committee should
establish policies that govern the circumstances under which contracts for the provision of
150 non-audit services can be entered into and procedures that must be followed by the external
auditors[1]. However, this code does not provide information on whether a formal approval
is required from an audit committee to purchase non-audit services.
The amount of the fees paid for non-audit services is not regulated or restricted under
any legislation or act. However, the amount incurred should be included or disclosed in
annual reports under items (18) and (19) of acdix 9 C of the Bursa Malaysia Listing
Requirements for main markets and the Access, Certainty, Efficiency market, respectively.
Therefore, publically listed companies are required to disclose non-audit fees that are paid to
corporations that are owned by external auditors or their partners. This disclosure clause
was made mandatory by Bursa Malaysia in 2001 and aimed to protect shareholders’
interests and increase corporate transparency. Before 2001, regulators in Malaysia
emphasized only the disclosure of audit fees in companies’ annual reports, as required by the
Companies Act 1965. However, the rules did not clarify whether clients need to specify the
type or nature of non-audit services engagement.
The Malaysian audit market differs from that of other developed countries in that it is
not competitive, because corporate governance is based on politically connected companies,
ethnicity, language and religion (Abdul Wahab et al., 2011; Haniffa and Cooke, 2002; Yatim
et al., 2006). A significant impact on auditing practices occurred in 2002 when the accounting
company Arthur Andersen ceased to practice in Malaysia in the fallout from the Enron case,
and this challenged auditor independence because of the auditors’ financial reliance on the
provision of non-audit services. Most firms that, until then, had been audited by Arthur
Andersen, switched to Ernst and Young, who, along with Price Waterhouse Coopers, KPMG
and Deloitte, dominate the Malaysian audit market.

3. Research hypotheses
3.1 Auditors’ non-audit services and accruals quality
Contrasting views exist in the role of non-audit services (Francis et al., 2004; Habib, 2012;
Schneider et al., 2006). First is the view that non-audit services provided by auditors lead to
knowledge spillover and thus increase the audit quality. This view proposes a positive link
between non-audit services and accruals quality. Kinney et al. (2004) offer three bases for a
positive relationship between non-audit services and the quality of financial reporting. First
is knowledge spillover; because non-audit services improve audit effectiveness, they assist
the auditor in developing a better understanding of the client’s business (Simunic, 1984). For
instance, knowledge of a client’s computer system or tax accounting could be used in the
audit, improve the audit and therefore increase the financial-reporting quality (Kinney et al.,
2004). Second, the analytical model of Dopuch et al. (2003) suggests that high-quality clients
with low misstatement risks are low ex-ante and that non-audit services to such clients
provided by their audit firms may increase their reputation capital. This, in turn, increases
the incentive for thoroughness in the audit and independence in reporting decisions. Benston
(1975) and Antle (1984) argue that on the general basis of contractual service, the desire for
non-audit services to improve their reputation encourages them to remain strongly
independent.
 The provision of non-audit services allows auditors to invest more in such reputational Accruals
capital, and they are unlikely to jeopardize their reputation to accommodate a client quality in
(Arruñada, 1999; Dopuch et al., 2003). Third, high-quality clients may seek more expert
computer systems and tax advice, internal audit services, and other audit-related
Malaysia
transaction services, and they may prefer that a particular audit firm supply these non-audit
services because of their quality or price. Based on these arguments, we would expect a
positive relationship between non-audit services and earnings quality.
An opposing view is that the provision of non-audit services may lead to economic 151
bonding between the auditor and the auditee, with the possibility of weakening the audit
quality and thus affecting the accruals quality. This economic dependence or bond
argument (Kinney et al., 2004; Francis, 2006) suggests that a negative relationship exists
between non-audit services and financial reporting quality. As such economic dependence
increases over time, the auditor may grow less willing to challenge possible misstatements
in the client’s financial statements. Agrawal and Chadha (2005) suggest that the provision of
non-audit services could hurt the quality of an audit by impairing auditor independence as a
direct consequence of the increase in economic bond and dependence. Koh et al. (2013) argue
that the provision of non-audit services by an incumbent auditor provides the client with
leverage because withholding non-audit services business penalizes the auditor without
affecting the client. Auditors placed in this position are more likely to accommodate client
preferences in return for being awarded non-audit services, which undermines the auditors’
independence (Koh et al., 2013), and leads to a lower earnings quality[2]. Srinidhi and Gul
(2007) argue that the relative differences in the regulative environment between audit and
non-audit services allow for the inclusion of rent in non-audit services, which makes it easier
for managers to influence auditors by including excessive rents in the non-audit fees instead
of in the audit fees.
Studies have produced mixed results. Those that find a positive relationship between the
provision of non-audit services fees and accruals quality, which denotes knowledge
spillover, are those of Koh et al. (2013), Larcker and Richardson (2004), and Antle et al. (2006).
By contrast, Dee et al. (2006), Mande and Son (2015), Reynolds et al. (2004), Lim et al. (2013),
Frankel et al. (2002) and Srinidhi and Gul (2007) find a negative relationship between non-
audit service fees and accruals quality, which indicates that these services denote economic
bonding that undermines auditor independence. Another group of studies (Lim and Tan,
2008; Mitra, 2007; Chung and Kallapur, 2003; Ashbaugh et al., 2003) finds weak or no
evidence of a relationship between non-audit services and earnings quality. Based on the
above arguments, we expect an association between non-audit fees and accruals quality.

3.2 Heterogeneity of non-audit services

3.2.1 Types of non-audit services. The heterogeneous nature of non-audit services is pivotal
in understanding their role. Different types of non-audit services have different
characteristics that affect whether they result in knowledge spillover or deepen the economic
bonding of the auditors. Our choice of types of non-audit service is accepted widely in the
literature as that usually offered by auditors to their auditees.
Most studies examine types of non-audit service centers on tax services. Krishnan et al.
(2013) outline three benefits associated with auditor-provided tax services. First, the overall cost
of these services will be less. Next, knowledge spillover, which is the insight that is gained in
providing tax services, can enhance audit effectiveness, and, in turn, the quality of the client’s
financial reporting. The knowledge spillover that is communicated between tax and audit
partners may mitigate auditor information asymmetry. Alternatively, providing such services
could increase an auditor’s economic dependence on a client, Krishnan et al. (2013) find that
PAR auditor-provided tax services enhance the value relevance of earnings; this supports their
32,2 argument on knowledge spillover.
Seetharaman et al. (2011) examine the relationship between tax-related non-audit services
and tax-related financial restatements and find a negative relationship. They argue that tax-
related non-audit services provide knowledge spillover to the incumbent auditor and thus
reduce the probability of tax-related financial restatements. However, they find no
152 relationship between tax-related non-audit services and overall financial restatements.
Robinson (2008) investigates the relationship between auditor-provided tax services and
going-concern opinions and finds a positive relationship. Findings from tax-related studies
suggest that tax-related audit services provide knowledge spillover and enhance financial
reporting quality. Paterson and Valencia (2011) find that recurring auditor-provided tax
services have a significant negative association with restatements, which is consistent with
the notion that tax services generate knowledge spillover, which improves audit quality.
Abdul Wahab et al. (2014) find a negative and significant relationship between tax-related
non-audit services and the likelihood of financial restatements. Based on these arguments,
we predict that the discretionary accruals are likely to be lower for firms that purchased tax-
related non-audit services.
The next type of non-audit service is audit-related. Following the argument of Beck et al.
(1988b), which benefits or detracts from the provision of non-audit services depending on
relative start-up costs, switching costs and knowledge spillover, audit-related non-audit
services should be closely related to audits and thus should provide knowledge spillover.
Similarly, we predict that the accruals quality is likely to be lower for firms that purchased
audit-related non-audit services.
Our third type is other non-audit services, those that are neither tax-related nor audit-
related non-audit services[3]. Examples of other non-audit services are a review of an
internal control system and a revision of the IFRS conversion. Lai and Krishnan (2009)
investigate the relationship between financial information system-related services, which
includes the design of internal accounting systems, as provided by the incumbent auditor
and firm value. Lai and Krishnan (2009) argue that such a provision could provide
knowledge spillover and could impair auditor independence. They claim that an auditor-
provided financial information system is more likely to meet audit needs as they already
know how the system works, which increases operational efficiency. They also argue that it
is possible that the auditor may not report financial restatements based on the system that
they designed. Based on this argument, we predict an association between other non-audit
services and accruals quality.
Based on Malaysian data, Abdul Wahab et al. (2014) find that audit-related non-audit
services reduce the likelihood of financial restatements, but other related non-audit services
do not.
3.2.2 Recurring vs. non-recurring non-audit services. The method developed by Beck
et al. (1988a) differentiates between the benefits gained from recurring and non-recurring, or
one-off, non-audit services to clients. Beck et al. (1988a) suggest that recurring non-audit
service engagements are more likely to generate knowledge spillover or differential benefits
that increase auditor independence. Ezzamel et al. (2002) state that the existence of cost
benefits from the joint provision of non-audit and audit services must be considered in terms
of recurring and non-recurring services. Recurring non-audit services generate a stream of
quasi-rents or annuity, which influences the economic bond between auditor and client
(Alexander and Hay, 2013).
A similar argument was mooted by Causholli et al. (2014), which predicts that future non-
audit services business could impair auditor independence. They argue that future
non-audit services fees present an important source of career advancement and, with it, a Accruals
source of a particularly strengthened economic bond with the client. Causholli et al. (2014) quality in
argue that an economic bond could intensify in the presence of financial incentives that
Malaysia
promote revenue growth, because it encourages audit partners to pursue revenue-generating
opportunities. Based on Beck et al.’s (1988a) and Causholli et al.’s (2014) arguments, a
negative relationship will exist between recurring non-audit services fees and accruals
quality (positive coefficients). 153
Evidence that examines the impact of non-recurring non-audit fees has been mixed. A
subsequent paper by Beck et al. (1988b) finds that recurring non-audit fees are somewhat
associated with a higher auditor tenure and increase bonding, which impairs auditor
independence. Paterson and Valencia (2011) find that recurring tax-related non-audit
services are associated negatively with financial restatements. Similarly, Abdul Wahab et al.
(2014) find that tax-related and audit-related non-audit fees are associated negatively with
financial restatements. Causholli et al. (2014) investigate the impact of future non-audit fees
and discretionary accruals and their proxy for earnings management and find a positive
relationship, which suggests that future non-audit services impairs auditor independence.
The situation is somewhat different when non-audit services are performed
intermittently, that is, for non-recurring services. Knowledge spillover from the joint
provision of services provides the incumbent auditor with a potentially long-term cost
advantage or monopoly that competitors will be unable to match with their standard audit
costs. Therefore, the incumbent auditor will charge the client a higher fee for the
engagement. The auditor is aware that competitors may be able to win the engagement in
any future period. However, the savings derived from knowledge spillover mean that
competitors’ typical audit costs will be higher than those of the incumbent auditor, and so
higher profits can be earned (Alexander and Hay, 2013). Based on the arguments by
Causholli et al. (2014), one would expect that non-recurring non-audit services do not impair
auditor independence as this arrangement does not generate future revenue-generating
opportunities and thus could have less impact on auditor independence.
DeBerg and Kaplan (1991) use the types of non-audit service as a proxy for whether fees
are recurring or non-recurring. They find that, regardless of whether services are recurring
or not, firms are less likely to change auditors. Parkash and Venable (1993) examine the
determinants of recurring and non-recurring non-audit services fees and argue that
knowledge spillover and economic bonding are higher when recurring non-audit services
are provided. Because the relationship is ambiguous, we predict an association between the
level of accruals with recurring and non-recurring non-audit fees.
3.2.3 Types of recurring and non-recurring non-audit service. As do Paterson and
Valencia (2011) and Abdul Wahab et al. (2014), we extend our test by incorporating both
characteristics, namely, types, and whether services are recurring or not. A theoretical
argument that is raised by Krishnan et al. (2013) and Paterson and Valencia (2011) suggests
that types of non-audit service provide knowledge spillover and increase audit
efficiency and effectiveness and thus increase financial reporting quality. We argue that
recurring non-audit services undermine auditor independence because of future economic
benefits for the auditor (Causholli et al., 2014) and create economic bonding (Beck et al.,
1988b). Because the arguments created are ambiguous, we predict an association between
recurring (or non-recurring) tax, audit and other related non-audit services and accruals
quality.
Our examination will provide a clearer understanding of how non-audit services affect
accruals quality over time. Paterson and Valencia (2011) and Abdul Wahab et al. (2014) find
PAR that recurring tax-related non-audit services provide some form of knowledge spillover and
32,2 reduce the likelihood of financial restatements.
3.2.4 Corporate governance variables and accruals quality. Prior research explains that
good corporate governance enhances auditor independence. Good governance will demand
more audit effort and thus increase auditor independence. The higher earnings qualities, the
less tendency for the manager in earnings management practice, the better the independence
154 in auditing. A vast of research link between corporate governance with earnings
management (Abed et al., 2012; Baxter and Cotter, 2009; Becker et al., 1998; Flynn, 2008; Gul
et al., 2002; Gulzar and Zongjun, 2011; Haber and Braunstein, 2008; Haw et al., 2011; Lin and
Hwang, 2010; Machuga and Teitel, 2009; Pergola et al., 2009; Thoopsamut and Jaikengkit,
2009). Therefore, this study predicts an association between corporate governance variables
and accruals quality.

4. Sample selection
We based our sample on 1,117 firm-year observations from 2009 to 2011. The non-audit
services fees and their characteristics were collected manually from annual reports
downloaded from the Bursa Malaysia website. We gathered all available corporate
governance variables from annual reports manually. We used data extracted from
Datastream to calculate our accruals model and other firm characteristics. As is done in
other studies, we exclude financial firms from our sample. The first and one-hundredth
percentiles of each continuous variable were winsorized to reduce the effect of outliers.
Table I tabulates our sample-selection process.

5. Research method
5.1 Regression models
We opted for the Francis et al. (2005) model of accruals quality, which is a modification
of that of Dechow and Dichev (2002)[4]. The Dechow and Dichev model uses firm-wise
time-series regressions with total accruals as the dependent variables and the cash flow
of previous, current and subsequent years as independent variables. The standard
deviation of the residuals for each firm is used as the accrual quality measure. Dechow
and Dichev (2002) highlight that the absolute value of the residual is an alternative
measure of accrual quality when such a measure is needed for each firm-year. The

Firms listed on tde main board as of 2011 822

Less
Finance firms 37
PN17 16
New Firms on the board in 2010 28
New firms on the board in 2011 14
Firms with no annual report 2012 37
Firms with no annual report 2008 8
Firms with no annual report 2009, 2010 and 2011 27 (167)
Total Firms 655
Three years of observations (2009-2011) 1,965
Less
Firms with no NAS provider (284)
Table I. Missing information (564)
Sample selection Total observations 1,117
reason for accruals quality being chosen in this study lies in Dechow and Dichev’s Accruals
(2002) argument that accrual quality is to be associated with the firm and industry quality in
features that are free from earnings manipulation. This construct is recurring and
observable and so differs from earnings management, which is considered
Malaysia
unobservable.
Based on comments by McNichols (2002), Francis et al. (2005) include two additional
independent variables, namely, changes in sales revenue and property, plant and
equipment (PPE), on the basis that this helps improve the expectations of current 155
accruals. We use the same model, and because we want the measure on a firm-year
basis, we use the absolute value of the residual as the measure of accrual quality. The
model is as follows:

TCA ¼ a0 þ a1 OCFi;t1 þ a2 OCFi;t þ a3 OCFi;tþ1 þ a4 DREVi;t þ a5 PPEi;t þ y i;t

(1)

The variables are as follows:

TCA = (DCA  DCash – (DCL  DSTDebt) );
DCA = Change in current assets;
DCash = Change in cash balance;
DCL = Change in current liabilities;
DSTDebt = Change is short-term debt that is included in current liabilities;
OCF = Operating cash flow;
DREV = Change in sales revenues; and
PPE = Property, plant and equipment.
All variables are scaled by average total assets. After computing the residual from (1), we
use the absolute value as the dependent variable in the following model, in which to address
the first research hypothesis:
j y i;t j ¼ b 0 þ b 1 NASi;t þ b 2 ACFINi;t þ b 3 ACINDi;t þ b 4 ACMEETi;t
þ b 5 ACSIZEi;t þ b 6 DUALi;t þ b 7 INDi;t þ b 8 BIG4i;t þ b 9 DEBTi;t
þ b 10 FAMILYi;t þ b 11 BUMIi;t þ b 12 NEQUITYi;t þ b 13 LOSSi;t
þ b 14 POLCONi;t þ b 15 ASSETSi;t þ b 16 INDUSTRIESi;t þ b 17 PERIODSi;t
þ m i;t

To address the second research hypothesis on types of non-audit services and accruals
quality, we have the following model:
j y i;t j ¼ b 0 þ b 1 TAXNASi;t þ b 2 ARNASi;t þ b 3 OTHERSi;t þ b 4 ACFINi;t
þ b 5 ACINDi;t þ b 6 ACMEETi;t þ b 7 ACSIZEi;t þ b 8 DUALi;t þ b 9 INDi;t
þ b 10 BIG4i;t þ b 11 DEBTi;t þ b 12 FAMILYi;t þ b 13 BUMIi;t þ b 14 NEQUITYi;t
þ b 15 LOSSi;t þ b 16 POLCONi;t þ b 17 ASSETSi;t þ b 18 INDUSTRIESi;t
þ b 19 PERIODSi;t þ m i;t

To address the third research hypothesis on the relationship between the recurrence
of non-audit services and accruals quality, we have the following model:
PAR j y i;t j ¼ b 0 þ b 1 NAS_RECURi;t þ b 2 NAS_NRECURi;t þ þ b 3 ACFINi;t
32,2 þ b 4 ACINDi;t þ b 5 ACMEETi;t þ b 6 ACSIZEi;t þ b 7 DUALi;t þ b 8 INDi;t
þ b 9 BIG4i;t þ b 10 DEBTi;t þ b 11 FAMILYi;t þ b 12 BUMIi;t þ b 13 NEQUITYi;t
þ b 14 LOSSi;t þ b 15 POLCONi;t þ b 16 ASSETSi;t þ b 17 INDUSTRIESi;t
156 þ b 18 PERIODSi;t þ m i;t

Finally, we have the following model to address the fourth research hypothesis when we test
the types of recurrence of non-audit services simultaneously:

j y i;t j ¼ b 0 þ b 1 TAXNAS_RECURi;t þ b 2 TAXNAS_NRECURi;t

þ b 3 ARNAS_RECURi;t þ b 4 ARNAS_NRECURi;t þ b 5 OTHERS_RECURi;t
þ b 6 OTHERS_NRECURi;t þ b 7 ACFINi;t þ b 8 ACINDi;t þ b 9 ACMEETi;t
þ b 10 ACSIZEi;t þ b 11 DUALi;t þ b 12 INDi;t þ b 13 BIG4i;t þ b 14 DEBTi;t
þ b 15 FAMILYi;t þ b 16 BUMIi;t þ b 17 NEQUITYi;t þ b 18 LOSSi;t
þ b 19 POLCONi;t þ b 20 ASSETSi;t þ b 21 INDUSTRIESi;t þ b 22 PERIODSi;t
þ m i;t

5.2 Independent test variables

The primary independent variable in this study is non-audit fees (NAS). As in other studies
(Bloomfield and Shackman, 2008; Huang et al., 2007; Kinney et al., 2004; Seetharaman et al.,
2011), non-audit fees that are deflated by total fees (NAS) are our measure for NAS. Non-
audit fees are segregated into several types that are deflated by total fees. These are tax-
related NAS (TAXNAS), audit-related NAS (ARNAS) and other NAS (OTHERS). Like
Paterson and Valencia (2011), we examine recurring (NAS_RECUR) and non-recurring NAS
(NAS_NRECUR), recurring (TAXNAS_RECUR) and non-recurring tax-related
NAS (TAXNAS_NRECUR), recurring (ARNAS_RECUR) and non-recurring audit-related
NAS (ARNAS_NRECUR) and recurring (OTHERS_RECUR) and non-recurring other NAS
(OTHERS_NRECUR). Also, like Paterson and Valencia (2011), we use consecutive periods
to determine whether the fees for each type of NAS are recurring or non-recurring[5]. The
general rule for the coefficients of the variables mentioned above is positive if it reflects a
decrease in accruals quality and thus impairs auditor independence (because an increase in
y i,t denotes a decrease in accruals quality). Negative coefficients for the abovementioned
variables denote an increase in accruals quality (because a decrease in y i,t denotes an
increase in accruals quality).

5.3 Corporate governance variables

Two sets of corporate governance variables exist. The first is board characteristics, and the
second is audit committee characteristics. Board characteristics comprise two variables: the
proportion of independent directors on the board (IND), and an indicator variable that is
equal to 0 if the chief executive officer (CEO) chairs the board of directors (DUAL), and one
otherwise. We offer four variables to represent audit committee characteristics: dummy
variable that is equal to 1 if the audit committee is composed entirely of independent Accruals
directors (ACIND); a dummy variable that is equal to 1 if the audit committee is composed of quality in
more than two-thirds of financially literate members (ACFIN); the proportion of an audit
committee meeting to the audit committee size (ACMEET); and the natural logarithmic
Malaysia
transformation of the number of audit committee members (ACSIZE). The premise of this
relationship is that a positive relationship exists between corporate governance variables
and accruals quality.
157
5.4 Institutional variables
To provide a more holistic view of Malaysia’s capital market, we include three variables that
are established in the literature. The first is the proportion of Bumiputras directors on the
board (BUMI), the second is an indicator variable that is equal to 1 if the firm is a family firm
(FAMILY) and the third is another indicator variable that describes politically-connected
firms (POLCON). We predict a negative relationship between BUMI and accruals quality
because they are viewed as being less transparent and high in secrecy (Haniffa and Cooke,
2002). We predict a positive and negative relationship with earnings quality for FAMILY
and POLCON.

5.5 Control variables

We control for firm size, which is the natural logarithmic transformation of total assets
(ASSETS); debt to total equity (DEBT); auditor size, which is equal to 1 if the firm is audited
by a Big 4 auditor (BIG4); and a dummy variable if the firm recorded a loss in the previous
year (LOSS). We also include industry dummies (INDUSTRY) and period dummies
(PERIOD) to control for any unobserved effects during the sample period[6]. Please refer to
Table II for the operational definitions of the variables.

5.6 Data description

Table III tabulates the descriptive statistics used in our study. The average AQ is 0.043,
which ranges from 0.000 to 0.389. Panel A in Table III describes the fee variables. The
average audit fees (AFEE) are RM 190921.600, with a maximum of RM 3.843m[7]. The
average non-audit fees (NAS_RM) are RM 49162.950, with a range between RM 105m and
RM 2.412m. TAX_RM, ARNAS_RM and OTHERS_RM average RM9263.320, RM
18324.860 and RM 21574.770, respectively. The average RECURRING_RM and
NON_RECUR_RM non-audit fees are RM 43771.550 and RM 5391.403, respectively. The
proportion of total non-audit fees to total fees is 0.179, with OTHERS comprising the highest
proportion of total fees at 0.080.
Panel B of Table III presents descriptive statistics for corporate governance variables. In
the sample firms, 69.2 per cent separates the CEO and Chairperson (DUAL) function, 44.2
per cent of sample firms have at least two-thirds of independent directors (IND) and 88.4 per
cent have independent audit committee members. On average, an audit committee meets
4.818 times per year (ACMEET), and audit committees have three members on average
(ACSIZE).
Panel C of Table III tabulates descriptions of the institutional variables. On average, the
proportion of Bumiputras directors (BUMI) is 0.315, with a range from zero to all being
Bumiputras. More than half of the sample firms (55.7 per cent) have some form of family
connection (FAMILY), and 9.1 per cent are politically connected (POLCON).
Panel D of Table III presents descriptive statistics for our control variables. A value of
60.3 per cent of sample firms is audited by a Big 4 auditor (BIG4). The average debt-to-
 32,2

158
PAR

variables
Table II.
Operational
definition of
Panel A: Dependent variable
1 AQ Accruals Quality : Modified Dechow and Dichev (Francis et al., 2005 model) Datastream
and annual
report
Panel B: NAS Fees ratios
2 NAS Non-audit fees deflated by total fees Annual report
3 TAXNAS Tax-related non-audit fees deflated by total fees Annual report
4 ARNAS Audit related non-audit fees deflated by total fees Annual report
5 OTHERS Other services non-audit fees deflated by total fees Annual report
6 NAS_RECUR Recurring non-audit fees deflated by total fees Annual report
7 NAS_NONRECUR Non-recurring non-audit fees deflated by total fees Annual report
8 TAXNAS_RECUR Recurring tax-related non-audit fees deflated by total fees Annual report
9 TAXNAS_NONRECUR Non-recurring tax-related non-audit fees deflated by total fees Annual report
10 ARNAS_RECUR Recurring Audit-related non-audit fees deflated by total fees Annual report
11 ARNAS_NONRECUR Non-Recurring Audit-related non-audit fees deflated by total fees Annual report
12 OTHERS_RECUR Recurring other services non-audit fees deflated by total fees Annual report
13 OTHERS_NONRECUR Non-recurring other services non-audit fees deflated by total fees Annual report
Panel C: Corporate governance
14 IND Percentage of Independent directors on the board Annual report
15 DUAL Dummy variable that takes the value of “1” if the board of director holds both Annual report
the position of chairman and chief executive officer and “0” otherwise
16 ACFIN An indicator variable of “1” if the audit committee is Annual report
financially literate, 0 otherwise
17 ACIND An indicator of “1” if all the audit committee are Annual report
independent, or “0” otherwise
18 ACMEET The proportion of audit committee meeting to the number of AC members Annual report
19 ACSIZE The number of directors in the audit committee Annual report
Panel D: Institutional variables
20 BUMI The proportion of Bumiputras director on the board Annual report
21 FAMILY Dummy variable coded as “1” if the firms have Annual report
family connection and “0” otherwise
22 POLCON An indicator variable of 1 if the firm is politically connected, Johnson and
or “0” otherwise Mitton (2003)
(continued)
Panel E: Control variables
23 BIG4 An indicator variable that takes the value of 1 if the auditor is a Big 4 auditor, Annual report
zero otherwise
24 LOSS An indicator variable that takes the value of 1 if Datastream
the firm recorded a loss in accounting return
25 DEBT Total debt deflated by total equity Datastream
26 ASSETS Natural log transformation of total assets Datastream
27 MTB Market to book value Datastream
28 CFO Cash flow from operations Datastream
29 TCA Total accruals Datastream
quality in

159
Malaysia

Table II.
Accruals
PAR
Mean Median Maximum Minimum SD
32,2
AQ 0.043 0.029 0.389 0.000 0.046
Panel A: Fees variables
AFEE 190921.600 125602.000 3843000.000 12000.000 271275.500
TFEE 240084.600 159000.000 5667000.000 21345.000 362915.500
160 NAS_RM 49162.950 19000.000 2412000.000 105.000 118677.500
TAX_RM 9263.320 0.000 1082000.000 0.000 58801.280
ARNAS_RM 18324.860 0.000 2412000.000 0.000 87476.180
OTHERS_RM 21574.770 0.000 1093000.000 0.000 67126.460
RECURRING_RM 43771.550 14600.000 2412000.000 0.000 116867.200
NON_RECUR_RM 5391.403 0.000 688000.000 0.000 29980.260
TAXRECUR_RM 8415.984 0.000 1082000.000 0.000 57397.810
TAX_NONRECUR_RM 847.335 0.000 356500.000 0.000 13317.550
ARNAS_RECUR_RM 15410.360 0.000 2412000.000 0.000 84446.220
ARNAS_NONRECUR_RM 2914.503 0.000 688000.000 0.000 24714.900
OTHERS_RECUR_RM 19945.200 0.000 1093000.000 0.000 66657.160
OTHERS_NONRECUR_RM 1629.565 0.000 210000.000 0.000 11306.960
NAS 0.179 0.140 0.888 0.001 0.150
TAXNAS 0.025 0.000 0.714 0.000 0.088
ARNAS 0.074 0.000 0.888 0.000 0.124
OTHERS 0.080 0.000 0.818 0.000 0.137
NAS_RECUR 0.155 0.104 0.888 0.000 0.152
NAS_NONRECUR 0.024 0.000 0.684 0.000 0.082
TAXNAS_RECUR 0.022 0.000 0.714 0.000 0.083
TAXNAS_NONRECUR 0.003 0.000 0.519 0.000 0.030
ARNAS_RECUR 0.061 0.000 0.888 0.000 0.115
ARNAS_NNRECUR 0.013 0.000 0.684 0.000 0.061
OTHERS_RECUR 0.071 0.000 0.818 0.000 0.133
OTHERS_NONRECURR 0.009 0.000 0.600 0.000 0.050
Panel B: Corporate governance
IND 0.442 0.430 0.860 0.170 0.126
DUAL 0.308 0.000 1.000 0.000 0.462
ACFIN 0.420 0.330 1.000 0.000 0.194
ACIND 0.884 1.000 1.000 0.500 0.152
ACMEET 1.536 1.670 4.330 0.330 0.361
ACMEET (NUMBER) 4.818 5.000 13.000 1.000 1.034
ACMEET(LOG) 1.551 1.609 2.565 0.000 0.210
ACSIZE (NUMBER) 3.184 3.000 6.000 2.000 0.478
ACSIZE 1.148 1.099 1.792 0.693 0.133
Panel C: Institutional variables
BUMI 0.315 0.250 1.000 0.000 0.288
FAMILY 0.557 1.000 1.000 0.000 0.497
POLCON 0.091 0.000 1.000 0.000 0.498
Panel D: Control variables
BIG4 0.603 1.000 1.000 0.000 0.489
LOSS 0.152 0.000 1.000 0.000 0.359
Table III. DEBT 0.223 0.170 0.690 0.000 0.208
Descriptive analysis ASSET_RM (‘000) 5,29,000 2,88,000 35,80,000 39,887 6,26,000
(2009-2011, (continued)
n = 1,117)
 Accruals
Mean Median Maximum Minimum SD
quality in
Malaysia
ASSETS 19.536 19.479 21.997 17.502 1.049
MTB 0.837 0.596 20.564 0.000 1.248
CFO 0.081 0.068 6.858 0.928 0.223
TCA 0.015 0.015 1.174 0.922 0.130
161
Notes: Where AQ is the absolute value of the estimation error from the modified Dechow and Dichev model
explained by Francis et al. (2005). NAS is the non-audit fees deflated by total fee. Non-audit services are partitioned
into TAXNAS, ARNAS and OTHERS. TAXNAS is tax-related non-audit fee deflated by total fees; ARNAS is the
audit-related non-audit fees deflated by total fee, and OTHERS is other services non-audit fees deflated by total
fees; NAS_RECUR is recurring non-audit services deflated by total fees; NAS_NONRECUR is nonrecurring non-
audit services deflated by total fees; TAXNAS_RECUR is the recurring tax-related non-audit fees deflated by total
fees; ARNAS_RECUR is the audit-related non-audit services deflated by total fees; ARNAS _NONRECUR is the
audit-related non-audit services deflated by total fees; OTHERS_RECUR is the other services non-audit services
deflated by total fees; OTHERS_NONRECUR is the other services non-audit fees deflated by total fees. ACFIN is
an indicator of “1” if the audit committee is financially literate and also the number of audit committee that become
the member of accounting association or “0” otherwise. ACIND is an indicator of “1” if all the audit committee is
independent or “0” otherwise. ACMEET is proportion of audit committee meeting to the numbers of audit
committee. ACSIZE is the log number of executive and non-executive director held in the firms. DUAL is the board
of director duality, represent by dummy variable takes the value of “1” if the board of director holds both position
of chairman and CEO and “0” otherwise. IND is the board of director independence, percentage of the independent
non-executive director in the firm. BIG4 is an indicator variable that takes the value of “1” if the auditor is big 4
auditor, “0”otherwise. DEBT is the total debt deflated by total equity. FAMILY is the dummy variable if the firms
are owned by more than one family member or “0” otherwise. BUMI is the proportion of Bumiputras board of
director in the firms. LOSS is an indicator variable that takes the value of “1” if the firm recorded a loss in
accounting return, “0” other. POLCON is the dummy variables if the firms owned by politically connected firm, or
“0” otherwise. ASSETS is the natural log of transformation of total assets. MTB is market-to-book, whereas CFO is
cash flow from operations. TCA is total accruals Table III.

equity ratio is 0.223 (DEBT). Prior losses have been recorded by 15.2 per cent of the firms
studied (LOSS), and the average size of sample firms is RM 529m.

6. Results
6.1 Univariate analysis
Table IV tabulates our correlations (Pearson- and Spearman-rank) for continuous variables.
Positive and significant correlations exist between NAS, TAXNAS, ARNAS and OTHER
and accruals quality (AQ), which lends initial support to the theory that non-audit services
create economic bonding and thus undermine independence. As expected, our non-audit
services fee variables are positively and significantly correlated with each other. Two of our
governance variables, IND and ACSIZE, are positively and significantly correlated with AQ,
whereas a negative but insignificant correlation exists between ACMEET and AQ.

6.2 Accruals quality model

Untabulated results are provided of the dependent variable, where the Dechow and Dichev
(2002) model is applied as modified by Francis et al. (2005). As predicted, the coefficient of
b 2 is negative, whereas those of b 1 and b 3 are positive. All three have a magnitude of less
than 1. The higher coefficient of CFOi,tþ1, the future figure, over the coefficient of CFOi,t1,
indicates that accruals in this sample have a stronger relationship with future cash flows
than with previous flows. This result is supported by Srinidhi and Gul (2007). Of the change
in sales, the coefficient reveals a positive sign with very significant value, in line with the
argument that changes in sales are expected to have higher total current accruals. This
 32,2

162
PAR

Table IV.

(N = 1,117)
year 2009–2011
Correlation matrix
Probability 1 2 3 4 5 6 7 8 9 10 11

1 AQ 0.115*** 0.046 0.021 0.051* 0.042 0.047 0.070** 0.062** 0.033 0.065**
2 NAS 0.108*** 0.008 0.043 0.023 0.053* 0.107*** 0.024 0.025 0.018 0.019
3 IND 0.054** 0.046 0.021 0.136*** 0.216*** 0.106*** 0.061** 0.027 0.118*** 0.024
4 ACMEET 0.025 0.005 0.070** 0.526*** 0.000 0.108*** 0.015 0.034 0.099*** 0.009
5 ACSIZE 0.064** 0.047 0.112*** 0.433*** 0.201*** 0.093*** 0.137*** 0.007 0.079*** 0.005
6 BUMI 0.046 0.011 0.215*** 0.068** 0.194*** 0.140*** 0.179*** 0.025 0.140*** 0.004
7 DEBT 0.076** 0.068** 0.087*** 0.078*** 0.078*** 0.142*** 0.160*** 0.121*** 0.211*** 0.040
8 ASSETS 0.079*** 0.025 0.101*** 0.003 0.156*** 0.169*** 0.148*** 0.061** 0.006 0.141***
9 MTB 0.128*** 0.032 0.023 0.090*** 0.146*** 0.020 0.048 0.138*** 0.274*** 0.034
10 CFO 0.016 0.052* 0.062** 0.024 0.029 0.061** 0.099*** 0.018 0.139*** 0.173***
11 TCA 0.044 0.002 0.001 0.008 0.053* 0.010 0.012 0.037 0.024 0.038

Notes: Where AQ is the absolute value of the estimation error from the modified Dechow and Dichev model explained by Francis et al. (2005). NAS is the non-
audit fees deflated by total fee. IND is the board of director independence, percentage of the independent non-executive director in the firm. ACMEET is
proportion of audit committee meeting to the numbers of audit committee. ACSIZE is the log number of executive and non-executive director held in the firms.
BUMI is the proportion of Bumiputras board of director in the firms. DEBT is the total debt deflated by total equity. ASSETS is the natural log of the
transformation of total assets. MTB is market-to-book, whereas CFO is the cash flow from operations. TCA is total accruals ***; ** and *denote significance at
the 1, 5 and 10% levels, respectively. The upper level represents Spearman rank, and the lower level represents Pearson correlation
result is in line with the modified Dechow and Dichev (2002) model: firms with a higher Accruals
gross PPE are likely to be firms with high assets in place and the tendency to have vast quality in
amounts of current accruals.
Malaysia
6.3 Multivariate analysis
Table V presents our main set of regressions. Column 1 of Table V shows the main
regression. A positive and significant relationship exists between NAS and AQ 0.029, (t =
3.055, p < 0.01), which provides support to the argument that the provision of non-audit
163
services creates economic bonding and thus reduces earnings quality. Our finding is similar
to that of Dee et al. (2006), Lim et al. (2013), Frankel et al. (2002), Mande and Son (2015),
Reynolds et al. (2004), and Srinidhi and Gul (2007), but is in contrast to that of Antle et al.
(2006), Koh et al. (2013), and Larcker and Richardson (2004). In addition, this finding is in
contrast to a recent Malaysian study by Abdul Wahab et al. (2014) that examines the
relationship between non-audit fees and the likelihood of financial restatements.
Columns 2 to 5 of Table V present individual regressions based on the type of non-audit
fees. We find a positive and significant relationship between TAXNAS, ARNAS and
OTHERS and accruals quality. Our findings suggest that types of non-audit services create
some economic dependence on the clients but do not generate knowledge spillover. The
positive coefficients for OTHERS support the argument by Lai and Krishnan (2009) that the
auditor could be reluctant to report material misstatements detected by the accounting or
internal system that they designed. Our findings are in contrast to those of Abdul Wahab
et al. (2014), Krishnan et al. (2013) and Paterson and Valencia (2011).
We find a positive and significant relationship between DUAL and AQ (0.004, t = 1.279,
p < 0.10), which suggests that having the positions of CEO and Chairperson held by the
same person is detrimental to accruals quality. We find a positive and significant
relationship between DEBT and AQ, but a negative and significant relationship between
FAMILY and AQ. Columns 1 to 5 of Table V document a positive and significant
relationship between POLCON and AQ, suggesting that firms with political connection
affect accruals quality. This finding is in line with Abdul Wahab et al. (2011). The average
variance inflation factor for this regression is 1.160, which suggests that it does not suffer
from multicollinearity. Other variables remain statistically significant, similar to column 1
of Table V.
Table VI tabulates regressions for recurring and non-recurring non-audit fees. Column 3
presents a regression with both variables together. A positive and significant relationship
exists for NAS_RECUR (0.027, t = 2.737, p < 0.01) and NAS_NRECUR (0.043, t = 2.517, p <
0.05). The nature of both non-audit services creates some form of economic bonding that
decreases earnings quality. Our finding is in contrast to the analytical model of Beck et al.
(1988a) but is similar to their empirical findings on recurring non-audit services (Beck et al.,
1988b). In addition, our finding on recurring non-audit services supports the argument
raised by Causholli et al. (2014) that suggests that such an engagement creates economic
bonding and could impair auditor independence, but differs from that of Alexander and Hay
(2013), as one can view their result as an outcome of knowledge spillover. Interestingly, we
find the same positive coefficients for non-recurring non-audit services against accruals
quality. This supports the argument raised by Beck et al. (1988a) that non-recurring non-
audit services undermine auditor independence.
We incorporate both types of non-audit services and recurring or non-recurring non-
audit services simultaneously in Table VII. Columns 1 to 6 of Table VII present regressions
with recurring and non-recurring types of non-audit fees, whereas column 7 presents the
final regression with all variables. We find that TAXNAS_RECUR, ARNAS_RECUR and
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164
PAR

Table V.
Auditor provided
non-audit services
and accruals quality
Expected Direction 1 2 3 4 5

Intercept ? 0.069** 0.076** 0.068** 0.076** 0.067**

2.037 2.242 1.998 2.243 1.972
NAS ? 0.029***
3.055
TAXNAS – 0.036** 0.049***
2.060 2.737
ARNAS – 0.018* 0.031**
1.571 2.520
OTHERS ? 0.005 0.021**
0.481 1.779
IND – 0.011 0.014 0.011 0.012 0.012
0.806 1.035 0.799 0.862 0.907
DUAL þ 0.004* 0.005* 0.005* 0.005* 0.004
1.268 1.394 1.430 1.437 1.256
ACFIN – 0.001 0.000 0.000 0.000 0.000
0.174 0.112 0.102 0.131 0.145
ACIND – 0.001 0.001 0.001 0.001 0.001
0.185 0.205 0.216 0.247 0.155
ACMEET – 0.001 0.001 0.001 0.001 0.001
0.174 0.279 0.272 0.266 0.196
ACSIZE – 0.015 0.015 0.018* 0.017 0.015
1.127 1.139 1.332 1.250 1.092
BUMI þ 0.004 0.006 0.005 0.005 0.005
0.632 0.880 0.735 0.660 0.803
FAMILY – 0.003 0.003 0.003 0.004 0.003
0.873 -1.020 -1.018 1.056 0.859
POLCON þ 0.011** 0.011** 0.011** 0.011** 0.011**
1.886 1.906 1.935 1.942 1.865
BIG4 – 0.000 0.000 0.001 0.001 0.000
0.108 0.156 0.405 0.209 0.042
LOSS þ 0.037*** 0.037*** 0.038*** 0.037*** 0.037***
9.448 9.444 9.554 9.432 9.463
DEBT þ 0.019*** 0.019*** 0.019*** 0.019*** 0.019***
22.604 22.591 22.625 2.620 22.586
(continued)
 Expected Direction 1 2 3 4 5

ASSETS þ 0.003** 0.003** 0.003** 0.003** 0.003**

21.777 21.920 21.776 21.955 21.712
MTB þ 0.005*** 0.005*** 0.005*** 0.005*** 0.005***
4.795 4.782 4.828 4.854 4.741
CFO þ 0.002 0.003 0.003 0.003 0.003
0.426 0.588 0.595 0.513 0.512
TCA þ 0.008 0.009 0.009 0.008 0.009
0.875 0.922 0.975 0.799 0.997
Period fixed Yes Yes Yes Yes Yes
Industry fixed Yes Yes Yes Yes Yes
Adjusted R2 0.13 0.13 0.13 0.13 0.14
F-statistic 8.58*** 8.30*** 8.18*** 8.04*** 8.02***
VIF Regression 1.16 1.17 1.16 1.16 1.18

Notes: Where AQ is the absolute value of the estimation error from the modified Dechow and Dichev model explained by Francis et al. (2005). NAS is the non-
audit fees deflated by total fee. Non-audit services are partitioned into TAXNAS, ARNAS and OTHERS. TAXNAS is tax-related non-audit fee deflated by total
fees; ARNAS is the audit-related non-audit fees deflated by total fee and OTHERS is other services non-audit fees deflated by total fees; NAS_RECUR is recurring
non-audit services deflated by total fees; NAS_NONRECUR is non-recurring non-audit services deflated by total fees. ACIND is an indicator of “1” if all the audit
committee are independent or “0” otherwise. ACMEET is proportion of audit committee meeting to the numbers of audit committee. ACSIZE is the log number of
executive and non-executive director held in the firms. DUAL is the board of director duality, represent by dummy variable takes the value of “1” if the board of
director hold both position of chairman and CEO and “0” otherwise. IND is the board of director independence, percentage of the independent non-executive
director in the firm. BIG4 is an indicator variable that takes the value of “1” if the auditor is big 4 auditor, “0”otherwise. DEBT is the total debt deflated by total
equity. FAMILY is the dummy variable if the firms are owned by more than one family member or “0” otherwise. BUMI is the proportion of Bumiputras board of
director in the firms. LOSS is an indicator variable that takes the value of “1” if the firm recorded a loss in accounting return, “0” other. POLCON is the dummy
variables if the firm is politically connected firm, or “0” otherwise. ASSETS is the natural log of transformation of total assets. MTB is market-to-book, whereas
CFO is cash flow from operations. TCA is total accruals; *; ** and ***denote significant levels of 10, 5 and 1% based on one-tailed test, respectively, for
directional predictions, while two-tailed tests for non-directional predictions (?). The general rule for the coefficients for the above-mentioned variables is positive
if it reflects a decline in accruals quality, and thus impair auditor independence (because an increase in y i,t denotes a decline in accruals quality). Negative
coefficients for the above-mentioned variables then denotes an increase in accruals quality (because a decrease in y i,t denotes an increase in accruals quality)

Table V.
quality in

165
Malaysia
Accruals
PAR Expected Direction 1 2 3
32,2 C ? 0.072** 0.071** 0.066**
2.070 2.043 1.911
NAS_RECUR ? 0.020** 0.027***
2.165 2.737
NAS_NONRECUR ? 0.028** 0.043**
1.743 2.517
IND – 0.011 0.010 0.010
166 0.821 0.779 0.734
DUAL þ 0.004* 0.005* 0.004*
1.311 1.476 1.290
ACFIN – 0.002 0.003 0.003
0.233 0.424 0.325
ACIND – 0.001 0.000 0.000
0.096 0.033 0.007
ACMEET – 0.001 0.001 0.001
0.238 0.312 0.213
ACSIZE – 0.016 0.019 0.016
1.238 1.409 1.245
BUMI þ 0.004 0.005 0.004
0.549 0.712 0.611
FAMILY – 0.003 0.004 0.003
0.834 1.073 0.861
POLCON þ 0.011** 0.011** 0.011**
1.948 1.988 1.936
BIG4 – 0.000 0.001 0.000
0.014 0.321 0.065
LOSS þ 0.037*** 0.037*** 0.037***
9.304 9.352 9.312
DEBT þ 20.019*** 20.019** 20.019**
22.569 22.555 22.543
ASSETS þ 20.003** 20.003** 20.003**
1.903 1.934 1.808
MTB 1 0.006*** 0.006*** 0.006***
4.643 4.761 4.708
CFO þ 0.003 0.001 0.001
0.501 0.212 0.184
TCA þ 0.001 0.001 0.001
0.145 0.051 0.078
Period Fixed Yes Yes Yes
Industry Fixed Yes Yes Yes
Adjusted R2 0.130 0.128 0.153
F-statistic 8.243*** 8.124*** 8.203***
VIF Regression 1.152 1.149 1.160

Notes: Where AQ is the absolute value of the estimation error from the modified Dechow and Dichev
model explained by Francis et al. (2005). NAS_NONRECUR is nonrecurring non-audit services deflated by
total fees; ACFIN is an indicator of “1” if the audit committee is financially literate and also the number of
audit committee that become the member of accounting association or “0” otherwise. ACIND is an indicator
of “1” if all the audit committee are independent or “0” otherwise. ACMEET is proportion of audit
committee meeting to the numbers of audit committee. ACSIZE is the log number of executive and non-
executive director held in the firms. DUAL is the board of director duality, represent by dummy variable
takes the value of “1” if the board of director hold both position of chairman and CEO and “0” otherwise.
IND is the board of director independence, percentage of the independent non-executive director in the firm.
BIG4 is an indicator variable that takes the value of “1” if the auditor is big 4 auditor, “0”otherwise. DEBT
is the total debt deflated by total equity. FAMILY is the dummy variable if the firms are owned by more
than one family member or “0” otherwise. BUMI is the proportion of Bumiputras board of director in the
firms. LOSS is an indicator variable that takes the value of “1” if the firm recorded a loss in accounting
return, “0” other. POLCON is the dummy variables if the firm is politically connected firm, or “0” otherwise.
ASSETS is the natural log of transformation of total assets. MTB is market-to-book while CFO is cash flow
Table VI. from operations. TCA is total accruals *; **and ***denote significant levels of 10, 5 and 1% based on one-
Recurring vs non- tailed test respectively for directional predictions, while two-tailed tests for non-directional predictions (?).
The general rule for the coefficients for the above-mentioned variables is positive if it reflects a decline
recurring non-audit in accruals quality, and thus impair auditor independence (because an increase in y i,t denotes a decline in
services and accruals accruals quality). Negative coefficients for the above-mentioned variables then denotes an increase in
quality accruals quality (because a decrease in y i,t denotes an increase in accruals quality)
 Expected Direction 1 2 3 4 5 6 7

INTERCEPT ? 0.073** 0.076** 0.070** 0.072** 0.075** 0.073** 0.065**

2.104 2.183 2.009 2.067 2.145 2.089 1.846
TAXNAS_RECUR ? 0.032* 0.047**
1.818 2.540
TAXNAS_NONRECUR ? 0.044 0.065
1.046 1.519
ARNAS_RECUR ? 0.014 0.029**
1.142 2.190
ARNAS_NONRECUR ? 0.024 0.039
1.112 1.780*
OTHERSRECUR ? 0.003 0.019
0.252 1.558
OTHERS_NONRECUR ? 0.023 0.041
0.855 1.524
IND – 0.013 0.012 0.011 0.010 0.011 0.011 0.012
0.942 0.883 0.821 0.755 0.824 0.836 0.858
DUAL þ 0.005 0.005 0.005 0.005 0.005 0.005 0.004
1.399 1.460 1.433 1.459 1.444 1.467 1.279
ACFIN – 0.003 0.003 0.002 0.003 0.003 0.003 0.003
0.352 0.353 0.310 0.378 0.331 0.366 0.353
ACIND – 0.001 0.001 0.001 0.001 0.001 0.001 0.000
0.054 0.117 0.105 0.061 0.102 0.074 0.026
ACMEET – 0.002 0.001 0.001 0.001 0.001 0.001 0.001
0.362 0.237 0.295 0.329 0.300 0.333 0.233
SIZE – 0.017 0.017 0.018 0.019 0.018 0.018 0.016
1.313 1.283 1.376 1.432 1.359 1.388 1.184
BUMI þ 0.005 0.005 0.005 0.005 0.004 0.005 0.005
0.776 0.689 0.667 0.657 0.617 0.672 0.789
FAMILY – 0.003 0.003 0.003 0.004 0.003 0.003 0.003
20.970 21.017 20.938 21.070 21.009 21.008 20.826
POLCON þ 0.011* 0.012** 0.011** 0.011** 0.011** 0.011* 0.011**
1.917 2.030 1.977 1.992 1.988 1.956 1.902
BIG4 – 0.001 0.001 0.001 0.001 0.001 0.001 0.000
0.182 0.260 0.351 0.328 0.238 0.290 0.011
LOSS þ 0.037*** 0.037*** 0.037*** 0.037*** 0.037*** 0.037*** 0.037***
9.290 9.365 9.399 9.327 9.306 9.342 9.316
(continued)

Table VII.
quality in

and accruals quality

non-audit services
Types, recurring
167
Malaysia
Accruals
 32,2

168
PAR

Table VII.
Expected Direction 1 2 3 4 5 6 7

DEBT þ 20.019** 20.019** 20.019** 20.019*** 20.019*** 20.019** 20.018**

22.544 22.566 22.567 22.575 22.571 22.553 22.512
ASSETS þ 20.003** 20.003** 20.003* 20.003** 20.003** 20.003** 20.003*
21.958 21.986 21.873 21.953 21.987 21.962 21.747
MTB þ 0.006*** 0.006*** 0.006*** 0.006*** 0.006*** 0.006*** 0.006***
4.640 4.723 4.733 4.673 4.691 4.755 4.687
CFO þ 0.003 0.003 0.003 0.003 0.003 0.001 0.001
0.458 0.446 0.446 0.469 0.440 0.210 0.193
TCA þ 0.002 0.001 0.002 0.001 0.001 0.001 0.002
0.154 0.144 0.218 0.068 0.081 0.074 0.216
Period Fixed Yes Yes Yes Yes Yes Yes Yes
Industry Fixed Yes Yes Yes Yes Yes Yes Yes
Adjusted R-squared 0.129 0.126 0.127 0.127 0.126 0.126 0.133
F-statistic 8.180*** 8.025*** 8.051*** 8.035*** 7.977*** 8.009*** 7.127***
VIF Regression 1.154 1.151 1.150 1.148 1.154 1.154 1.174

Notes: Where AQ is the absolute value of the estimation error from the modified Dechow and Dichev model explained by Francis et al. (2005). NAS_RECUR is
recurring non -audit services deflated by total fees; NAS_NONRECUR is nonrecurring non-audit services deflated by total fees; TAXNAS_RECUR is the
recurring tax-related non-audit fees deflated by total fees; ARNAS_RECUR is the audit-related non-audit services deflated by total fees; ARNAS _NONRECUR is
the audit-related non-audit services deflated by total fees; OTHERS_RECUR is the other services non-audit services deflated by total fees; OTHERS_NONRECUR
is the other services non-audit fees deflated by total fees. ACFIN is an indicator of “1” if the audit committee is financially literate and also the number of audit
committee that become the member of accounting association or “0” otherwise. ACIND is an indicator of “1” if all the audit committee are independent or “0”
otherwise. ACMEET is proportion of audit committee meeting to the numbers of audit committee. ACSIZE is the log number of executive and non-executive
director held in the firms. DUAL is the board of director duality, represent by dummy variable takes the value of “1” if the board of director hold both position of
chairman and CEO and “0” otherwise. IND is the board of director independence, percentage of the independent non-executive director in the firm. BIG4 is an
indicator variable that takes the value of “1” if the auditor is big 4 auditor, “0”otherwise. DEBT is the total debt deflated by total equity. FAMILY is the dummy
variable if the firms are owned by more than one family member or “0” otherwise. BUMI is the proportion of Bumiputras board of director in the firms. LOSS is an
indicator variable that takes the value of “1” if the firm recorded a loss in accounting return, “0” other. POLCON is the dummy variables if the firm is politically
connected firm, or “0” otherwise. ASSETS is the natural log of transformation of total assets. MTB is market-to-book while CFO is cash flow from operations.
TCA is total accruals; *; ** and ***denote significant levels of 10, 5 and 1% based on one-tailed test respectively for directional predictions, while two-tailed tests
for non-directional predictions (?). The general rule for the coefficients for the above-mentioned variables is positive if it reflects a decline in accruals quality, and
thus impair auditor independence (because an increase in y i,t denotes a decline in accruals quality). Negative coefficients for the above-mentioned variables then
denotes an increase in accruals quality (because a decrease in y i,t denotes an increase in accruals quality)
OTHERS_RECUR non-audit services are positively and significantly associated with Accruals
accruals estimation error, which affects accruals quality negatively. A positive and quality in
significant relationship results only between ARNAS_NONRECUR and accruals error and
is thus negatively associated with accruals quality. Our results suggest that all recurring
Malaysia
and different types of non-audit services could undermine auditor independence.

6.4 Additional tests

169
6.4.1 Auditor size. We extend the analysis by examining the relationship between non-audit
fees and accruals quality for Big 4 and non-Big 4 auditors[8]. DeAngelo (1981) argues that
accounting firm size is a proxy for auditor independence because no single client is
important to a large auditor, and the auditor’s greater reputation is at stake if they
misreport. By contrast, an accounting firm with only one client may conclude that they have
more to gain by complying with the client’s demand and that this affects the audit quality
(Francis et al., 2004). In addition, larger audit firms could lose more significantly by
succumbing to client pressure, and these results in a higher degree of independence
(Notbohm et al., 2015). Larger audit firms have better material misstatement abilities, better
opportunities to specialize and receive better training in the audit process, which suggests
that larger firms provide better audit quality (Notbohm et al., 2015).
Notbohm et al. (2015) provide two reasons why joint provisions of non-audit and audit
services by smaller firms provide a higher audit quality. First, differences in audit expertise
between small and large audit firms suggest that smaller firms could benefit even more from
non-audit services that are provided to the client. Second, in general, larger firms have a
greater separation between audit and non-audit personnel than smaller firms, which
suggests that knowledge spillover may transfer easier in smaller firms. Notbohm et al.
(2015) find that smaller firms that provide tax services have a negative relationship with
financial restatements.
The premise of this test relies on the fact that the level of auditor independence depends
on the identity of the auditor being Big 4 and non-Big 4. Our non-tabulated results suggest
that non-audit fees that are provided by either the Big 4 or non-Big 4 affect accruals quality
negatively[9].
We extend the analysis by examining the types of non-audit services. We find that
TAXNAS and ARNAS decrease accruals quality when these services are provided by non-
Big 4 auditors. This finding supports the argument by DeAngelo (1981) that smaller
auditors value non-audit services and have more to gain by complying with their client’s
demand and suggests a decrease in accruals quality.
6.4.2 Politically connected firms. Given the background of political connections in
Malaysia, we perform additional analysis by separating the sample between politically
connected firms (POLCON = 1) and non-politically connected firms (POLCON = 0). Our
untabulated results show that the NAS fees are negatively and significantly associated with
accruals quality only for connected firms. The extended analysis finds ARNAS is negatively
and significantly associated with connected firms.
6.4.3 Firm size effect. Following Srinidhi and Gul (2007), we perform additional analysis
on the size effect. A possible issue with the use of non-audit fee sizes is whether the results
are driven mainly by the size of the client firms, and so the fee magnitudes are reflected in
this rather than in economic bonding. The earlier result that is tabulated in Table VII proves
that a non-audit fee has negative associations with accrual quality; if that fee merely
reflected the firm size, their associations with accrual quality would have the same sign.
We find a negative and significant coefficient for the interaction terms NAS * ASSETS
(–0.019, t = –2.032, p < 0.05), which suggests that the positive relationship between NAS
PAR and accruals quality is less for bigger firms. We observe similar results for TAXNAS and
32,2 ARNAS non-audit services, but not for OTHERS. Further investigation of recurring and
non-recurring non-audit services fees shows that the positive relationship is weaker only for
NAS_RECUR and not for NAS_NRECUR. There has been no change in the standalone non-
audit fee variables when we run the interaction terms.
6.4.4 Use of indicators instead of continuous variables. This study repeats the main
170 regression using indicator variables for the magnitude of non-audit fees. In all cases, we
represent below-median values of fee variables with an indicator variable value of 0 and
above-median values of 1. This study uses indicator variables to test for the possibility of a
threshold level of non-audit fees, above which the benefit to the auditor of retaining
the client is higher than any expected cost from litigation and loss of reputation. If this is the
case, changes in fees in the regions that lie entirely above or below the threshold level will be
inconsequential, and the indicator variables more appropriately confine the effect of fee
variables on accrual quality.
We find a positive and significant relationship between NAS (which is equal to 1 if it
exists above the median) and accruals quality, which suggests that higher levels of non-
audit service have a negative impact on accruals quality. A similar approach to the types of
non-audit services fees provided yields results that are similar to those for tax-related non-
audit services.
6.4.5 Separate analysis for low and high levels of non-audit fees. Following Srinidhi and
Gul (2007), this study examines whether the effects of fee variables vary with fee levels. To
investigate differences in effect, this study splits the sample into two subsamples for each
variable at its median value. For example, the samples are divided into a below-median non-
audit service subsample and an above-median non-audit services subsample, and the effect
of the non-audit services is examined within each of the two subsamples. We find a positive
and significant relationship between NAS and accruals quality for samples that have non-
audit services above the median value, that is, differences exist between these two sub-
samples.

7. Conclusion
This study contributed to the literature on the role of non-audit services and how they affect
accruals quality. Similar to Paterson and Valencia (2011), we add a multi-period dimension
while retaining the distinction between fee types. Our results show that auditor-provided
non-audit services affect accruals quality negatively, which suggests that these services
create economic bonding and undermine independence. Recurring and non-recurring non-
audit services affect accruals quality negatively. All types of recurring non-audit services
affect accruals quality adversely. Only non-recurring audit-related services decrease
accruals quality. This is a useful addition to the current debate on the role of non-audit
services in Malaysia. The findings in this paper are in contrast to Abdul Wahab et al.’s
results (2014), provide motivation to push for a regulative approach to the provision of non-
audit services by incumbent auditors and imply that further refinements are warranted as
related to the types of service that may be offered by auditors as non-audit services. The
findings could suggest a refinement on the MIA by-laws focusing on auditor independence,
and these could assist other regulative bodies such as the Securities Commission the stock
exchange (Bursa Malaysia) in ensuring better governance on the provision of non-audit
services. Further studies need to be conducted in order for Malaysia to follow the USA in
restricting the requirements of non-audit services, as the current evidence is rather scarce.
Notes Accruals
1. Please refer to Principle 5, Uphold Integrity in Financial Reporting in the Revised Code of quality in
Corporate Governance under Recommendation 5.2. Malaysia
2. A prediction of a negative relationship will result in positive coefficients for non-audit fees.
3. Examples of other-related non-audit services are a review of statement of internal control and
Financial Reporting Standard conversion study. These services are usually not part of the
services permitted by MIA by-laws. However, where a specific service is not addressed in the by- 171
laws, the general provisions that deal with professional independence would apply.
4. Our results remain robust with the Dechow and Dichev (2002) model of accruals quality.
5. Because three years of data are used, we do not consider non-audit fees of a similar type that firms
purchased in 2009 and again in 2011, as recurring. The reason for this pattern may be that a different
type of NAS was purchased in 2010, or it is possible that the data were unavailable in 2010.
6. For the sake of brevity, we do not report the industries and period dummy coefficients. Results
can be obtained from the corresponding author.
7. The data is in Ringgit Malaysia (RM), the currency of Malaysia.
8. For the sake of brevity, tables for these tests are not tabulated. They are available from the
corresponding author.
9. A test of differences of mean and median between Big 4 and Non-Big 4 auditors indicates that
firms that are audited by Big 4 auditors purchase significantly higher non-audit fees.

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Corresponding author
Wahab Effiezal Aswadi Abdul can be contacted at: effiezal.abdulwahab@curtin.edu.au 175

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